An investment management company based in Rhode Island has introduced a new exchange-traded fund strategy aimed at capitalizing on the automatic stock purchases that occur when companies join major market indexes.
Hedgeye Asset Management unveiled the Hedgeye Index Adds ETF on May 28, targeting the mandatory buying activity from index funds and portfolio managers who must adjust their holdings when benchmark providers modify major U.S. market indexes such as the Standard & Poor’s 500.
The fund’s launch comes just two weeks before the highly anticipated public stock offering of shares in the SpaceX company owned by entrepreneur who also founded Tesla. This upcoming deal could potentially value SpaceX at $1.75 trillion and is already influencing established rules about which companies qualify for inclusion in major market indexes. Earlier this year in late March, just before SpaceX announced its intention to trade publicly on the stock exchange, officials announced changes to listing requirements designed to prevent newly public large-scale companies from experiencing extended delays before joining major indexes.
This situation echoes a previous scenario involving another company founded by the same entrepreneur. When Tesla shares became publicly traded in 2010 and Standard & Poor’s later announced the company’s inclusion in the S&P 500, the decision sparked more than $50 billion in purchasing activity from index-tracking investors.
According to the investment firm’s prospectus, this type of market activity is exactly what Hedgeye aims to predict and profit from. The company plans to maintain positions in no more than 40 publicly traded companies whose shares either already qualify for index inclusion or may soon meet those requirements, then liquidate those positions on the first day of trading after the stocks join a target index.
“For decades this index inclusion trade has been the preserve of a small subset of the investment industry,” said Brooks Cutright, the new fund’s manager. He noted that this market opportunity has historically been unavailable to most individual investors.
